News & Policy

WDFN-AM: Good morning. Welcome back to the Saturday morning Financial Workout with Bill and Steve. This morning, as we promised, we have Vince Snowbarger, who is the acting director of the Pension Benefit Guaranty Corporation, otherwise known as the PBGC for an interview this morning. Good morning, Vince, how are you doing today?

Vince Snowbarger: Good morning, Bill and Steve.

WDFN-AM: We're glad to have you in this morning. We appreciate your time. We know you are a very busy man, especially these days, and what's happening in Washington and in our economy today. So we have a lot of clients in the Detroit metropolitan area who are concerned, and rightly so about their pension plans. And we thought it might be best to get our answer straight from the, I guess the horse's mouth.

Vince Snowbarger: You aren't going to say the horse's mouth are you?

WDFN-AM: Well, it's better then the rear, I guess.

Vince Snowbarger: I suppose that's right.

WDFN-AM: Again, we thank you for coming in. So if it's all right with you, I just wanted to ask you a few questions and get some insight from you.

Vince Snowbarger: That'll be fine.

WDFN-AM: Okay. First of all for our listeners who don't know what the PBGC is, can you tell us what the PBGC is?

Vince Snowbarger: Sure. PBGC is a program that was set up by the federal government; we're a federal corporation. And we're set up to insure private defined benefit pensions. And those defined benefit pensions are basically pensions that you earn over the time that you're at work, and then thy pay out normally a monthly benefit once you retire.

WDFN-AM: Okay. So they [inaudible] pensions that the people who work for companies like Ford, Chrysler, GM, IBM and the like?

Vince Snowbarger: Right. The one distinction, I guess, I would make is that some of those companies would also offer what are called, they're typically referred to as 401K plans, which are a defined contribution and we do not insure those.

WDFN-AM: Now, how did the PBGC get started?

Vince Snowbarger: Well, you mentioned the car companies, interestingly enough PBGC kind of rose out of the failure of Studebaker back in 1963 when Studebaker went under, the retirees received only about 15 cents on the dollar for the pension plans that they had with the company. It took about ten years for Congress to finally respond to that issue. And in 1974, Congress passed an act called ERISA. It's the Employee Retirement Income Security Act, and PBGC was setup as a part of that act.

WDFN-AM: Okay. So the government started that because of a failed auto company. And it's interesting that PBGC got started because of a car company failure, and now almost 50 years later we see the surviving Detroit three automakers in really bad shape with some talk of bankruptcy. Should we expect any of their pension plans to become PBGC's responsibility?

Vince Snowbarger: Well, before we panic anyone, let's, let's be clear that none of the Detroit three automakers has actually filed for bankruptcy at this point. And the other thing I want to make very clear is that just because a company goes into bankruptcy doesn't necessary mean that they terminate their pension plan. Clearly, the auto industry has some major, what we refer to as legacy cost, in other words cost for benefits or promise to prior workers. But again none of those companies are at the point where they're talking about terminating their plans. As a matter of fact, we, over the past few years, we've worked with at least 13 auto suppliers who have gone into bankruptcy but have been able to come out of bankruptcy with their pension plans intact.

WDFN-AM: So there's many cases where a company actually goes bankrupt and the pension plans still operates and functions efficiently, is that what you're saying?

Vince Snowbarger: Well, yes, that's correct, I mean, well, it's not technically that. What happens is that there are two kinds of bankruptcy. One is the kind of bankruptcy were a corporation would no longer exist at the end of the bankruptcy. In other words, they'd sell off all the assets and pay all those debts and it just goes away. Typically, we're talking about, the bankruptcies [inaudible] was talking about are what are called chapter 11 or reorganization kinds of bankruptcies, where the companies going in to try to reorganize it's debt so that it can continue to exist as a, an ongoing company. And those are the kinds of companies that we've worked with to; to try help them maintain their pension plans.

WDFN-AM: Now, it's sometimes reported that the PBGC insurance covers a portion but not all of a worker's pension plan benefit; is that right?

Vince Snowbarger: That's correct. The law that setup PBGC also set some limits on the amount of guarantee that we can provide for the, for last year, or excuse me, for the year 2009 that guarantee is basically $54,000 a year. I want to be careful with that number, however, because that number represents the maximum amount that we can guarantee for a worker age 65 who does not provide a survival benefit, and there's some other limits as well. So before people get locked in their head that they are guaranteed $54,000, you know, that presumes again that they don't retire early, that all of their benefits have been placed for longer then five years. And there's some other complicated limits that we have, but basically it's $54,000 a year.

WDFN-AM: Now, if you've just tuned in we're interviewing Vince Snowbarger, who's the acting director of the Pension Benefit Guaranty Corporation. He's been kind enough to grant us an interview and answer some of your questions about what might happen to some of the pensions that you're relying on today. Suppose I'm already retired and if PBGC takes over my plan, what kind of changes could I expect?

Vince Snowbarger: Well, first of all we want to give an assurance out there that if we do have to take over a plan and you're already retired, we want to continue that payment stream, again to the extent we can by the guarantees, but carried over smoothly into our own operation. You know, when the limits apply, we may have to go in and adjust the payments that we're making to you. But if you were receiving a benefit before the company terminated the plan then we try to keep you in pay status while we make all those calculations and adjustments.

WDFN-AM: Okay. Just one follow up on that $54,000 figure that you had quoted a little earlier. Let's say I'm collecting a pension that's greater than $54,000, is it pretty much guaranteed that my pension will be reduced if it's taken over by PBGC?

Vince Snowbarger: There are so many factors that go into that, including the age at which you retired and the makeup of that, that benefit. Again, if a benefit is promised to you but has not been in effect for a full five years, that benefit may be phased in. If you've retired prior to age 65, then your benefit may be reduced. So there a number of factors that figure into that and each of those are calculated on an individual bases. And that's why I wanted to be cautious about saying that we can guarantee up to $54,000 a year. There are a lot of limits to that, and just because you might be receiving something, you know, already, and particularly if you're receiving something, it goes over that limit; you can almost assuredly be receiving a reduced benefit.

WDFN-AM: Is there anything on the website for PBGC where if I was an individual I could go to get an idea of what would happened, or is it just a wait and see thing for these people [inaudible]?

Vince Snowbarger: Well, no, I mean, we have a website. And that's www.pbgc.gov, and that has a number of frequently asked questions that someone can go on the web and get some at least general idea about how PBGC operates. Again a caution that I would give to your listeners is that each individual plan is administered on it's own merits. We normally take in a plan and calculate benefits based on what that plan, it offers. We don't have a one size fits all, in other words. And then once we figure that out, we place that up against the limits that we have on our guarantees to actually come up with the final result. But at least some of the questions that we've been talking about this morning, certainly you could find answers to those general questions on our website.

WDFN-AM: You're listening to the Saturday morning Financial Workout. And we're talking here with Vince Snowbarger. And Vince, there's been a lot of news reports saying that the termination of GM's hourly plan would hit the PBGC hard, doubling the agency's billion dollar deficit, can the PBGC cope with this?

Vince Snowbarger: The answer to that is rather complicated, but let me say in the short term that the answer to that question is yes we would be able to cope. PBGC's deficit at the end of our fiscal year, which was last September, September 30th was $11.5 billion. And you're correct that as we've looked at the pension plans in the auto industry, if those were to come in to us, that could close to doubling that deficit. And I think that's, so I think that's a reasonable ballpark. But in terms of intermediate impact, people need to understand that when a plan terminates we not only get the liabilities of that plan but we also get the assets of that plan. And then we also pay out those benefits over a longer period of time. They aren't all due to the individual at one point and time, so that we can stretch those payments, or do stretch those payments over a long period. We have the opportunity to invest the assets, so those are continuing to earn some income for us. And it would be quite a long period of time before PBGC would be in any desperate situation in terms of making payments to any of the participates that receive benefits from us.

WDFN-AM: Well, it seems like with all these bailouts going on, if they just gave you a little piece of that pie there we could fix this problem.

Vince Snowbarger: Well, I think because we have a longer term time horizon, they're going to deal with the immediate problems first.

WDFN-AM: Yeah [inaudible].

Vince Snowbarger: It could be at some point and time that'll...

WDFN-AM: Yeah.

Vince Snowbarger: We'll have to look at that. But, very frankly, we are set up as a self-financing corporation. By that I mean that there are no federal tax revenues that come in to PBGC, we're financed primarily by premiums that are paid by the plan's sponsor's, by the assets that we take over in plans, by the investment returns that we make on investing those premiums and assets. And then also sometimes we're fortunate enough to recover some of the liability back in bankruptcy recoveries. So all those go together to make up the assets that we have to pay liabilities from.

WDFN-AM: This is Steve and Bill with the Saturday morning Financial Workout. And you're listening to Vince Snowbarger. Vince it's really good to have you on this thing. One of the things that I'm thinking about is that if there is a bankruptcy, and the PBGC pays up to the maximum amount regardless of how badly underfunded, where do the dollars come from to make up the difference?

Vince Snowbarger: Well, yeah, that's a good question in the long term; because obviously by definition any plan that we take over has more liabilities then they do assets. But again we do have premiums that come in and that would cover some of the shortfall. In other words, the premiums covers much more then our administrative expenses. But it does not cover the full amount of liabilities that we take on. We do have investment returns. Last year our board adopted a more aggressive investment policy to try to increase those returns. And again recall that we're going to have that money to be able to work with over a long period of time and hopefully grow at least some of that deficit through the investment returns.

WDFN-AM: So Vince, does any of the funding come from taxpayers?

Vince Snowbarger: None of the funding comes from taxpayers at this point. It's all through the premiums that are paid, and then like I say the assets that we take over and invest.

WDFN-AM: You're listening to Steve and Bill with Vince Snowbarger, the acting director of the Pension Benefit Guaranty. So if he sounds like he knows what he's talking about, he does. Now, Vince there were very big funding gaps in the steel and the airline plans when the PBGC took them over earlier in this decade. If you have to pickup a big underfunded car company plan, how can the PBGC remain self-financing?

Vince Snowbarger: We remain self-financing for a while. I mean there's clearly a gap that occurs at some point in time. Just recall that we pay out those benefits over a long period of time so that if we were to take in a large amount of assets, in some ways that kind of keeps us moving for a little bit longer, because we're paying them out over a long period of time. And that's kind of what happened with the airline industries and steel industries when they came in. These plans come in underfunded, but they come in with some assets. And again when our asset pool grows, obviously the income that we can earn from those grows as well. So you might think that, well, at some point we're going to have to figure out how to figure out how to fill that final gap, but we're not at that point anytime soon.

WDFN-AM: Vince, when companies are under great financial stress and look at bankruptcy or some other path that offloading and insolvent pension plan, can the Pension Benefit Guaranty do anything to help avoid or postpone that outcome?

Vince Snowbarger: Well, we certainly don't have any particular interest in taking over pension plans. So if we can find some way to help that company keep the plan in place that's certainly in our best interest as well as that of the participants in that plan. There are a few opportunities that are provided by statue to deal with problems in funding the plans, and we try to help companies understand those. There are times when companies are going through various types of reorganization where they might be selling off assets, or they might be merging with other companies, that kind of thing. We're watching those kinds of transactions all the time to try to protect the interest of the pension plan. And, for instance, what I mean by that is that if we see some change in that corporation in the way it's structured. Let's say they were selling off assets, we would [inaudible] that sales price would go into an underfunded pension plan. In the case where DaimlerChrysler was divided a couple of years ago, we sort of intervened in that negotiation and were able to get some concessions out of Daimler as they left the Chrysler portion behind. And Chrysler at the same time put in an extra; I think 200 million dollars into their pension fund. Daimler guaranteed another billion dollars for a five year period of time. So we try to intervene in that way, and try to help the corporate sponsors behave responsibly towards their pension plans.

WDFN-AM: Now, Vince, for those people who are collecting checks right now from a company, let's say something did happen where PBGC has to intervene, do the checks continue on the same bases, or there ever any gaps in the monthly checks that are coming, or do they continue even if they are reduced?

Vince Snowbarger: There shouldn't be any gap in that payment period. I won't say that it's never happened, we have had situations, particularly with much, much, smaller employers, where they ran out of money, totally abandoned their plan. But for the most part, large plans continue the payments to their participants. And again, as PBGC steps in, we try to keep those payments going without any interruption.

WDFN-AM: Vince, some people call the defined benefit pension plan, you father's pension plan. Most younger workers only have a 401K and will never see a monthly pension check, do these kinds of pension plans have a future in the American workplace?

Vince Snowbarger: Well, clearly there's been a large decline in defined benefit plans. And I think what your listeners need to understand is that employers offer benefit packages that are attractive to new employees. And there was a time period here where there was much more interest in trying to cover your retirement benefits by providing a 401K. That's the kind of retirement plan that employees were looking for as they were searching for new jobs. But we also have to understand what's happened to those 401K plans during the most recent downturn and currently during the downturn. Many people have lost an awful lot of value that was in that 401K plan. They had responsibility for how those funds were invested, and there was no protection against that investment risk. And so a number of those people who just had 401K plans, again had seen their pension, retirement plan decline sharply, therefore their retirement is not as secured as they would of thought it was. Defined benefit plans do provide some of that protection because the entity that's burying that investment risk is the employer. And it's, I guess what I'm trying to say is it's possible that although there was a declining interest in defined benefit plans, say over the past couple of decades, that might turn around as people begin to understand the benefits that a defined benefit plan has to offer over a 401K.

WDFN-AM: We've been talking with Vince Snowbarger, who's the acting director of the Pension Benefit Guaranty Corporation. Vince, we've greatly appreciated you spending the time with us, I had one last question for you. You can answer this if you'd like. Let's say I worked for XYZ Company for 15 years, and when I left the company, the company said I could take a lump sum from my pension, or I could wait and get an annuity from the company, let's say they were offering that to Vince Snowbarger, what would he do?

Vince Snowbarger: I'll tell you before I started working here, I probably would have taken a lump sum, since I've started working here I'd take the annuity. And the primary reason for that is exactly what I was talking about with the 401K experience. Once I take that lump sum out, I'm now responsible for the investment return on that amount of money and I have no protection anymore from the defined benefit guarantee that's provided by PBGC, I'm at risk for any investment losses I might make. I think it's, from my perspective it's wiser to take that annuity.

WDFN-AM: Well, that's comforting, and I'm sure that'll be comforting to our listeners, knowing that the majority of the retirees in the Detroit metropolitan area are going to get a defined benefit plan from their employer. So Steve did you have any final questions for Vince...

WDFN-AM: Before I let him go.

WDFN-AM: No, no follow up questions, Vince, and I really appreciate you coming on the show.

Vince Snowbarger: Sure, glad to do it.

WDFN-AM: Vince, we'll be talking to you again in the future, hopefully. And we wish you the best and prosperity at the PBGC. And I will talk to you shortly. Thanks again.